Palo Alto Networks Inc.: Can the ‘$128 Million Man’ Invigorate PANW Stock?

PANW stock - Palo Alto Networks Inc.: Can the ‘$128 Million Man’ Invigorate PANW Stock?

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A third-quarter earnings beat by Palo Alto Networks Inc. (NASDAQ:PANW), a cloud-based security company, was overshadowed by its hiring of Nikesh Arora as its next CEO. Arora has an impressive resume, having held C-suite positions at both Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Softbank Group Corp. (OTCMKTS:SFTBY), where he was once considered heir-apparent to CEO Masayoshi Son.

But he comes at a hefty price, a pay package worth an estimated $128 million per year. The share price dropped $8 over the weekend on the news, to $201, and was due to open June 6 at $204. (Editor’s note: PANW stock is trading at $202.10 as of this writing.)

The loss of $460 million in market cap, from Arora’s appointment to the Wednesday opening, shows that some on Wall Street are skeptical he can bring $128 million in value to the company.

Palo Alto Networks Is On Fire

Palo Alto has been one of the hottest names in the computer security business this year, and for good reason.

The company’s third-quarter earnings release revealed revenue growing 31% year-over-year. The company forecast 23% year-over-year revenue growth for the next quarter and total revenue approaching $2.25 billion. Keep in mind, PANW’s market cap is $18.7 billion.

While Palo Alto is best known for its VM-Series of cloud-delivered firewall security, it recently introduced an Application Framework, through which it hopes to build an ecosystem of third-party security apps and customer apps. Shepherding this to success will be Arora’s first job.

Arora also faces a competitive market against Fortinet Inc. (NASDAQ:FTNT), FireEye Inc. (NASDAQ:FEYE), Cyberark Software Ltd. (NASDAQ:CYBR) and such industry heavyweights as Cisco Systems Inc. (NASDAQ:CSCO), all of which have been doing well in 2018 after the stocks were generally becalmed in 2017.

Of the newer players, however, Palo Alto is the largest by market cap and regularly appears on Gartner’s “magic quadrant” of leaders in Enterprise Network Firewalls.

Cloud firewall management is expected to continue growing at almost 28% per year through 2022, with the highest rate of growth coming from international markets, where Arora’s experience should be helpful.

Everyone to the Cloud

Like every other part of the software business, security is rapidly moving to the cloud and Palo Alto was one of the first companies to get there. Discrete firewalls are still being sold, but the growth is in Web Application Firewalls and cloud firewalls, with privately held Barracuda Networks Inc. joining the fray just last month.

The field is growing increasingly complex, however, and scaled, with competitors like Fortinet introducing machine learning to their Web firewalls to try and scope out threats as they are being deployed.

Competition from other vendors and from hackers means profits can be hard to come by for anyone. Palo Alto lost $60.9 million, or 67 cents per share, on a GAAP basis for the third quarter, and its estimates of future profit are all based on non-GAAP measurements.

The Bottom Line

The appointment of Arora is designed to provide a “halo effect” in an industry where such assurances are hard to come by.

The computer security business requires teams of programmers to stay imaginatively ahead of threats. A CEO can walk into a boardroom to close a deal, but whether his word is good depends on the software making him look good.

How many high-quality programmers could Palo Alto have hired with that $128 million per year, which represents almost 5% of its estimated 2018 revenue? That’s the bug Palo Alto competitors are now going to be putting in customers’ ears, and Arora is going to have to provide good answers for Palo Alto to retain its industry leadership.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/palo-alto-networks-inc-can-the-128-million-man-invigorate-panw-stock/.

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